Educated Trading & Investing

Educated Trading & Investing

Todays S&P Short Term Trading Bias: Bullish

7 February 2017

Last Update: 7 Feb / 0130

Accuracy Since Inception: 518/611 winners (85%)

Current Market Analysis:

Last Monday, amid the uproar over immigrant vetting, stocks opened lower. The immediate reaction of soothsayers and other market opinion makers was that the Trump rally was over and finally financial reality would set in. We don’t pretend to know, but the selling could be the start of a trend change or merely profit taking. The Case-Shiller House price index rose to an all time high of 183.25 and has fully recovered from the 2008 crash. The National Association of Realtors reported pending home sales rose 1.6% in December vs. the expected 0.6% increase. Unfortunately, the recent mortgage rate run up has the potential to dampen things until wages can catch up as there will be a paucity of qualified buyers under Dodd-Frank lending rules. The Commerce Department’s report on December’s consumer spending showed a 0.5% increase, the most in three months; personal spending also increased. Core PCE price index was up only 0.1%, in line with expectations. On the negative side personal incomes came in below expectations at + 0.3%.
Tuesday the selling continued as the raucous noise from left & right worried a confused investment world. Stocks were off significantly in the early going but buyers stepped in late and halved the early losses. GM reported 3% lower sales but Ford said U.S. retail sales are up 6% percent while total car sales were off 1% in January.
Wednesday began with ADP reporting that 246,000 new jobs in January, vs. the 168,000 expected by the experts. This may put the Fed in a position to raise rates once more as the number is well above "guidance" figures they rely on. Later in the day, the economic surge was confirmed when the ISM reported that its manufacturing index at 56% compared to December’s revised 54.5%, the fifth increase in a row and the best level since 2014. New orders increased to 60.4% and employment to 56.1%, the best in two years. There is a lot of optimism out there at the moment. All of this good news got to be too much for those who think the stimulus spigot might be completely turned off and the averages sold off at mid-session. As we mentioned earlier in the week the Mortgage Bankers Association reported that applications fell 3.2%, refi applications dropped 1% and purchase applications decreased 6% for the week ended Jan. 27. The Fed said it will slowly raise rates this year but didn’t say when and this gave heart to buyers who drove the averages slowly higher. The ISM PMI was reported at 56% up from 54.7% with new Orders, production and employment growing while inventories are shrinking and supplier deliveries slowing.
Thursday stocks opened sluggishly and meandered mostly sideways all day before closing the day mixed. The Census Bureau’s construction spending index fell 0.2% in December to an annual rate of $1.181 trillion but was still up 4.2% compared to December 2015. Things heated up on the trade war front as we finally got some recognition that the Euro is being manipulated lower to help EU exports. The President’s National Trade Council, Peter Navarro, said in the FT that the euro is a German currency in disguise that is “grossly undervalued” so that Germany can retain a competitive edge over the United States. This generated the typical bleating from Mrs. Merkel but sadly for her, the German finance Minister Wolfgang Schäuble was quoted in the German newspaper Tagesspiegel that, in his opinion, the Euro is "too low" for Germany, validating the criticisms from the President and Mr. Navarro. Morgan Stanley is out with an estimate that the Euro is 40% overvalued but mainly because the ECB is trying to stimulate the weak EU economies which means that German economic hegemony remains in place. It is just one more unintended consequence of a half fast trading agreement that tries to unite disparate social and economic cultures under an un-elected, top down Administrative regime. This, along with the ridiculous debt rating equality imposed on the EU system, leads to disastrous consequences and is near to bringing about the collapse of the whole house of cards.
Friday the averages soared from the opening as the unemployment reports are showing a big increase in business confidence that the tangled web of government will be reduced in complexity and that growth will no longer be a dirty word. The BLS reported nonfarm payrolls were up 227,000 in January vs. economists’ guesses of 175,000. Compared with 57,000 in December, this is a big shift indeed. The labor participation rate increased while the U-6 number of employable age workers not in the labor force dropped by 0.2% as 76,000 re-entered the workforce. This accounted for an increase in the overall unemployment rate to 4.8%. For all of the selling during the week, the S&P still rose 0.01% while NASDAQ & the Dow were slightly lower.

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